Benchmark to Stay in the Black
Current economic situations have many dairies trying to reduce expenses in an effort to stay in the black.
Dairy farmers need to ask themselves, “Am I reducing my expenses for the right reasons?” says Tim Swenson, senior dairy business consultant with AgStar Financial Services.
Swenson outlined how farmers can implement benchmarks on their operations to limit spending correctly and improve profitability at Farm Journal’s MILK Business Conference in Las Vegas last month.
As dairies grow in size, there are more factors that come into play. It is a whole lot easier to be the captain of a row boat than of a giant cruise ship, Swenson says.
“I can’t stress enough the need for farmers to make independent choices for their business,” Swenson says. Don’t make a change just because the neighbor is doing something. “There is no one right answer for every operation. If there was, it would be easy. Where we’re at now is not easy times.”
One reason that choices are different from one dairy to the next is where an owner-operator is at in their business cycle.
Swenson equates the business life cycle to various phases of growing crops. If you are just starting up a dairy, you’re planting the seeds of the operation. Once you’ve gotten to expansion and formulation you have started tending or cultivating the crop. When the business has started to mature and transferred to the next owner, that is the time to harvest.
Not only are there differences in businesses there are differences in goals. A producer may have different goals amongst the family, different goals for the business and different goals for themselves.
“It is a tricky balance to pull all of those into some sort of alignment,” Swenson says. “It is critical to make those goal assessments. If you are not true to yourself or your business, you may say one thing but you’ll be doing something else.”
Dairy farmers have more data at their disposal than ever before and it can be difficult to figure out how to best utilize it. Setting up benchmarks is one way to measure how the dairy is performing.
“Unless you have that stake in the ground that you can measure from you, can’t make adjustments. You can’t make new decisions to see where your operation is going,” Swenson says.
A benchmark report can include an array of expenses including: bedding, breeding, custom harvesting, heifer raising, labor, interest, nutrient management and insurance. It should have multiple years represented to determine if progress has been made.
“Being able to see how you compare with yourself is critical when we think of benchmarking,” Swenson says.
Benchmarking reports from AgStar allow farmers to look at the averages of other farms to see how they stack up and what it takes to be in the top 25%. Records are treated on a consistent basis to keep a reliable data set.
As a dairy begins to benchmark it is important to keep track of when major business events happen through the years. For instance if a cash crop enterprise is added, the herd has expanded or heifers are sent out to a custom raiser, those business changes should be taken into account.
“It is critical to know when picking up financial statements or a benchmark report that you understand the basis on what is being compared,” Swenson says.
Feed is the largest value expense on a dairy farm at more than half of the cost of production. Labor and herd replacement costs are about 25% of the budget combined. The last quarter tends to be overhead, capital and other production costs incurred.
Understanding the “why” is the critical piece of benchmarking, Swenson says. Maybe feed costs are higher for a dairy because additional supplements are being purchased. That extra nutrition might be leading to increased bulk tank averages for butter fat and protein, helping create more revenue in the milk check.
“It ultimately comes down to pounds of components sent out the door,” Swenson says of maximizing dairy profit. It is easy to brag about large milk weights of 90-100 lb., but if it is mostly water it didn’t help in the long run.
Swenson recommends using leading indicators like pregnancies rate, milk starts and heifer growth rates to determine your success. He prefers those measures over lagging indicators such as calvings, milk production and age-at-first calving.
“A leading indicator is a measurable metric that changes before the business starts to follow a particular pattern or trend,” Swenson says. “They are independent of what has happened in the past.”
Using those leading indicators will keep farmers looking forward instead of through the rearview mirror.